benefits

The phrase “Internet of things” has become a convenient catch-all for all manner of technologies that carry this common characteristic — they’re capable of sharing their data not only with each other but also with other information technology systems, enabling far deeper insights into how well they’re running and what’s going on around them.

In 2015, more than 15.4 billion gadgets fell into this uber category, according to data from market research firm IHS. That number could double by the end of 2020, and then again by the end of 2025. These “things” can be installed virtually everywhere, from factory floors to streetlights to water pipes — cities alone could spend at least $20 billion on sensor networks by 2020.

But one area to watch closely from sustainability perspective will be technologies related to buildings, both commercial and residential. Think of it this way: the Internet of things (aka IoT) is crucial for broader adoption of smart buildings. That will have big implications for how companies handle energy management. And for the next three years at least, IoT will be more pervasive in smart commercial buildings than anywhere else, suggests consulting firm Deloitte.

Things are certainly pointing up. Revenue related to installations of sensor-equipped lighting, climate control equipment, thermostats, and other automation systems could quadruple over the next decade to about $732 billion, predicts Navigant Research in a report published in early December.

“Connected or IoT devices in commercial buildings or homes enable a variety of applications and provide benefits related to automation, convenience, and, of course, energy efficiency — and these benefits are starting to resonate among building managers, homeowners, and even renters,” said Navigant principal research analyst Neil Strother.

More evidence that interest becoming more serious: ABI Research predicts that revenue related to IoT-enabled smart building technologies should grow to more than $8 billion in 2020, compared with just $625 million last year. The bulk of that money will be related to smart lighting and “intuitive” HVAC control systems, according to the research firm.

“IoT platforms such as GE’s Predix, IBM’s Watson, and SAP’s HANA, in collaboration with facility service providers, like CBRE, ISS World, and ENGIE, are gradually creating inroads by integrating multiple building automation systems to deliver a unified facilities management solution,” said ABI analyst Adarsh Krishnan. “the ‘make or buy’ dilemma of whether to develop the solution in-house or collaborate with a third-party technology vendor.”

What makes the transformation so hard, of course, is the long life expectancy of heating, ventilation, and air-conditioning systems — usually at least 15 years, and counting.

But leading manufacturers are working diligently to instrument and automate their systems through IoT hardware and software, so that commercial buildings can respond better to environmental stimuli or a company’s energy efficiency policies. Here’s a cheat sheet of 10 big players to watch closely in the upcoming year (presented alphabetically).

Cisco

Part of San Jose, California-based networking giant Cisco’s “Internet of Everything” mantra is an energy efficiency concept it started pushing more aggressively in early 2016 called the “Digital Ceiling.”

The idea is to consolidate smart lighting networks and other Internet-connected devices into a centralized dashboard that can be controlled via a smartphone application. The system includes smart lighting that doesn’t require a separate electricity source—they are powered by the Ethernet network itself. Cisco lined up an impressive list of partners, including LED lighting pioneer Cree, to help evangelize the idea.

Hitachi

There’s been plenty of buzz about the 106-year-old Japanese conglomerate’s compelling business model for microgrids. Back in May, however, Hitachi began touting its IoT strategy, which is based on a technology called Lumada.

This platform will be relevant across a broad range of applications not just smart buildings, including connected vehicles, although details about the technology are just starting to emerge. “While it is still very early days in the IoT platform market, the landscape is crowded, making it difficult for new vendors to differentiate themselves,” said Christian Renaud, an analyst for 451 Research. “Hitachi’s extensive expertise in operational technology and IT gives them a unique understand of the fundamental requirements to build and deploy IoT solutions at scale.”

Honeywell

Honeywell’s IoT strategy already touches about 10 million smart buildings worldwide. One of the Morris Plains, N.J.-based company’s latest forays is a mobile app — which sounds similar to technology from startup Comfy — that lets building occupants report issues with heating or cooling. Basically, people become “sensors” alongside digital counterparts such as sensor. “Occupant engagement is an increasingly important aspect of intelligent building solutions,” said Navigant analyst Casey Talon.

IBM

The tech giant has been involved with a myriad of smart-this-and-that initiatives related to its Smarter Planet campaign. Now, IBM, based in Armonk, N.Y., is putting the firepower of its Watson artificial intelligence and data analysis software behind its projects that make buildings smarter.

One of its biggest customers for the technology is ISS, a facilities management company that will use Watson in more than 25,000 buildings to assess readings from sensors on windows, doors, chairs, food dispensers, air conditioning systems and so on. The sensors on doors, for example, can help commercial kitchens within these facilities figure out how many meals to cook for lunch, helping cut back on food waste. “Putting a ‘human touch’ in buildings helps to increase employee productivity, decrease absenteeism, and makes a better impression on visitors,” said ISS CEO Jeff Gravenhorst.

Deals beween mammoth players in building automation and connectivity, such as the one between Johnson Controls and Cisco, are becoming more common.

Johnson Controls

Already a big proponent of the push to net-zero buildings and the idea that buildings should “talk” to each other, $37.7 billion Johnson Controls became an even larger force in IoT technologies when the Milwaukee, Wisconsin, company merged in September with security services firm Tyco. Johnson Controls allied with IBM on the smarter building cause back in 2010, and moved closer to Cisco earlier this year (it’s one of several companies supporting the Digital Ceiling framework).

Legrand

The French-born electrical component manufacturer, which has been taking a deeper interest in sustainable business practices across its own operations, launched its IoT initiative dubbed ELIOT in November.

Legrand sees its technology as the glue tying together automation technologies from the likes of Samsung and Cisco. The effort even supports Alexa, Amazon’s voice-controlled home automation gadget, which is being engineered to handle tasks such as adjusting lights or temperatures. It helps that $4.5 billion Legrand’s sales for connected devices were more than $350 million in 2015, up 34 percent. “Legrand is built in, not simply plugged in,” said Stephen Schoffstall, chief marketing officer for the company. “This distinction is critical when you consider that ELIOT is an expression of Legrand’s determination to evolve the experience of living, working, and operating in buildings — and to minimize the impact those buildings will have on the environment.”

Panasonic

The Japanese company is already a well-known player in green building technologies such as energy-efficient lighting, refrigeration, air conditioning, heating and renewable energy. Like its biggest peers and competitors, it is prioritizing investments that use data from these systems to help them run ever-more efficiently. One example is its agreement with Germany’s Schneider Electric, announced in October, under with the two companies are collaborating on wireless technology that connects Schneider’s building management system with Panasonic HVAC systems that use variable refrigerant flow (VRF) technology. Translation: the amount of energy they require can be adjusted more finely than previous generations of the equipment.

“By combining the power of building management with cutting-edge VRF technology, we are able to help our customers further reduce capital and operating expenditures and reach new levels of sustainability,” said Toshiyuki Takagi, executive officer of Panasonic Corp., and president of Panasonic Air-Conditioner.

Schneider Electric

The energy management specialist, which has been especially vocal in the past about smart cities projects, overhauled its smart building product line called EcoStruxure in late November. You might think of Schneider first as a hardware company, but its partnership with cloud services giant Microsoft is focused on helping companies analyze operational data more efficiently. Its aforementioned partnership with Panasonic is also powerful.

Siemens

An emerging force in commercial and community microgrids, German conglomerate Siemens is also shoring up its IoT expertise. During 2016, it announced separate partnerships with IBM and consulting firm Capgemini to build even more credibility. The IBM pact centers on creating a cloud service to help corporate real estate managers gain access to energy efficiency metrics for their facility portfolios. The deal with Capgemini has a similar goal.

Verdigris Technologies

This San Francisco upstart is using artificial intelligence to collect information from a building’s electrical panels and then analyze these “fingerprints” for opportunity to optimize settings and to predict possible maintenance issues that could boost power consumption.

Verdigris raised $6.7 million in an October venture capital round that was led by contract manufacturer Jabil and Verizon Ventures, bringing total funding to about $15 million. The company is doing well helping companies in the hospitality sector reduce electricity usage; Hyatt, Marriott, and Starwood Hotels are all customers.

Building owners and property managers that take on the responsibility of limiting energy consumption can be looked at as environmental leaders. While energy management adds extra tasks to everyday lists, the benefits outweigh the time and money spent, which is usually returned in savings.

There are numerous areas to take into consideration when it comes to commercial buildings, and being that commercial buildings are generally large, the impact can be large as well. These areas include the HVAC system, chillers, windows, lighting, electrical equipment, and any other factors that may be contributing to the building’s energy consumption.

While there are various ways to be involved with bettering the environment outside of where you live and work, starting in a place that you occupy everyday has the potential of having long term results if the actions are carried through as often as you’re there.

Consider creating an outlined approach for managing the building’s energy with these areas in mind:

Identify Sustainable Alternatives Where Energy is Being Used:

Are there upgraded, energy-efficient versions of the equipment you can be using instead?

Could you use different settings on the equipment?

Assess the Purpose of Every Area:

Is the lighting being utilized in every room?

Is the size of the HVAC system an adequate fit for the building and its purpose?

Evaluate Maintenance Plans:

How frequent are the utilities maintained?

Do the maintenance technicians practice with energy efficiency in mind?

Look for Possible Areas of Energy Loss:

Are the building’s windows sealed properly?

Is the equipment too old for efficient functioning?

These are questions you should ask yourself if you’re trying to assess energy consumption and find that alternative route to save not only energy, but money as well.

After addressing these questions, you may find yourself planning to make some changes. Here is the information you should know for doing so:

Energy Efficient Equipment: Whether it’s the HVAC system, the utility lighting or the other various appliances being used in the building, there are energy-efficient options to consider. This includes ones with ENERGY STAR ratings, which match the standards set by the government.

Settings & Thermostats: Just by being knowledgeable about specific settings and the different types of available thermostats, you can be saving a substantial amount of energy. Depending on the type of building and the function(s) of the building, settings can be applied to use less energy in an area that doesn’t need it. The same idea goes for thermostats. Programmable thermostats allow for precise regulation of energy consumption. This means making sure the temperatures aren’t set too high or too low when the building or part of a building isn’t in use. Programmable thermostats keep the location comfortable when needed, but help save energy when it’s not.

Lighting: It’s better to be the building that turns its lights off when it isn’t being used, than a building that keeps them on 24/7. It’s also important to consider energy-saving types, such as LED or solar. With these kinds, you can also invest in timers and dimmers.

HVAC Size: According to ENERGY STAR, “at least 25% of all rooftop HVAC units are oversized, resulting in increased energy costs and equipment wear.” Determining what size HVAC system the building needs is a job for a professional technician, and it’s an important part of the overall building assessment.

Maintenance: Building maintenance is not only important for saving energy and money, it’s important for the building’s health and those occupying it. This includes electrical, HVAC, plumbing, etc. While there are tasks you can manage on your own, there are specific tasks that are recommended for the hands of a professional technician. Whatever the area, it’s important to have maintenance scheduled. Having a definite schedule helps to prevent sudden issues, which prevents sudden energy loss as well.

Technicians: Certain companies know the importance of offering energy-efficient services. This means that they practice in ways that are beneficial for the environment. Research the companies in your area and look for the ways they’re working to save energy and you money. This is an important quality, and more companies are beginning to realize that.

Windows, Replacements & Other Areas of Loss: Other ways to assess energy is by looking into the not so obvious. This includes windows, old systems that don’t show signs of stress until it’s too late, and too many running appliances and pieces of equipment causing heat. If windows aren’t sealed properly, especially in summer and winter, your HVAC system may be working harder than it has to in order to reach the desired temperature. Leaks of hot or cold air will cause this. Another concern are systems that don’t show signs of stress. If the system is old, it’s definitely recommended to have it maintained, even if you think otherwise. The inside has moving parts that may be working very hard to keep it running, and the machine giving out might be the first sign if you wait too long. Lastly, there may be too much heat. Too many heat producing appliances or pieces of equipment may cause the air conditioner to work harder, similar to an open window on a hot summer day.

Commercial buildings don’t function alone, they need the help of energy, and all building owners and property managers can help conserve it.

John Losey is the owner and founder of The BP Group,a leader in Commercial HVAC Services

According to a guide to the energy retrofit market entitled “Deep Energy Retrofits: An Emerging Opportunity” and published by the American Institute of Architects (AIA) in conjunction with the Rocky Mountain Institute (RMI), “Energy efficiency in existing buildings is most often addressed by upgrading dated engineering systems such as lighting and HVAC systems with better performing technologies… A design-centered, holistic approach to a retrofit, in which all the interactions in a building’s systems are considered can yield substantially higher energy savings. Retrofits of this type, called deep energy retrofits, aim for energy savings upwards of 50%.”

A green or sustainable building refers to both the real estate (land, building, fixtures, furniture and equipment) and its maintenance, or the use of processes that are environmentally responsible and resource-efficient throughout its life cycle (e.g., site planning, building design, construction, occupancy and operation including maintenance and renovation, and, finally, demolition. In our corporate brochure, we state that “A facility made sustainable by Emerald SkylineCorporation will have a small carbon footprint, high occupant comfort, limited environmental impact and conserved natural resources.”
Accordingly, a deep sustainable retrofit, hereinafter referred to as a “Deep Retrofit,” is designed to lower energy, water and waste disposal bills as well as operating, maintenance and insurance costs with increased marketability and higher long-term values due to a higher tenant capture rate resulting in premium occupancies and rental rates as well as reduced risk resulting in a lower cap rate upon sale. Other benefits include improved employee health, productivity and satisfaction from improved indoor environmental quality.

With recognition of the increasing importance of resiliency in the ability of a building to survive and recover from a catastrophic event, any Deep Retrofit should also include improvements that reduce a building’s vulnerability and risk due to stronger winds, higher storm surge, more frequent flooding, wild fires and other natural hazards that threaten our families, livelihoods, businesses and properties.

As a Deep Retrofit represents a significant modernization of a facility during which over 50% of the building is renovated, the optimum time to implement a Deep Retrofit is upon acquisition, to improve a building that suffers from significant vacancies, to reposition or repurpose a building, pursuant to a new lease (or renewal thereof) to a major tenant or timed to certain events in a property’s life cycle. A Deep Retrofit is a tremendous catalyst for a building’s comeback.

According to Jack Davis in a 6/14/2012 article entitled “Energy-saving Deep Retrofits published by the Urban Land Institute, “Deep retrofits are part energy efficiency project, part real estate project, and can be daunting in their cohesive nature. However, in a 2011 study the New Buildings Institute found that “in most projects, the cost of the efficiency portion was not distinguishable due to the renovation nature of the work.“

Mr. Davis makes another valid point: “Psychologically, Deep Retrofits are simply more inspiring that a piecemeal approach. They they do not occur by accident; they imply the involvement of a capable team with a plan and the technical abilities to pull it off. They grab our attention in a unique way. In the competition to secure and retain tenants, with buildings certified under the LEED program becoming the norm in some markets, deep retrofits offer a gut-level indicator that this building is different.”

RMI defines Deep Retrofit Value (DRV) as “the net present value of all of the benefits of a deep energy or sustainability investment.” In the case of a Deep Sustainable Retrofit, the analysis includes a calculation of the change in market value resulting from the implementation of the Deep Retrofit, which is based on the income approach to value in a full property valuation.

The first step in the analysis of a Deep Retrofit is to perform a diagnostic assessment of the Building. The assessment will include:

Gain an understanding of the building’s historical performance through an analysis of existing usage of, and expenditures for, energy, water, building maintenance and cleaning supplies as well as tenant behavior

Perform a sustainability audit of mechanical, electrical, plumbing and other building systems as deemed appropriate which includes an estimate of the capital investment required as well as a forecast of future utility, maintenance and operating cost savings,

Evaluate internal environmental quality, waste disposal practices, purchasing and other operating policies, procedures and practices which will also include a calculation of any savings or incremental costs realized as a result of the Deep Retrofit; and

Determine the resiliency of the property by ascertaining the building’s ability to absorb and recover from actual or potential adverse effects of stronger storms, higher storm surge, wildfires and more frequent flooding.

The next step is to complete what RMI refers to as a “Value Element Assessment” which is designed to identify the potential types of value that may be created by the Deep Retrofit. The four key elements of added value are:

Retrofit Development Costs: As noted in the capital budgeting process in our article on the Capital Budgeting Analysis of a Sustainability Project, any direct and indirect savings are measured against the capital cost to be incurred. The Retrofit Capital Cost Equation is as follows: Gross capital cost less avoided capital costs less cost savings through design less cost subsidies, rebates and incentives equals Retrofit Capital Costs

Energy and Non-Energy Operating Costs: The first financial benefit from a Deep Retrofit will appear in the utility bills as both the wattage consumed and the amount of peak-demand billing that is avoided will result in an immediate reduction in the electric and gas bills as well as the water bill. Non-energy operating cost savings are realized from new technology, improved performance information and operating savings from reduced maintenance requirements, and, including resiliency measures in the Deep Retrofit is anticipated to result in reduced property, flood and hazard insurance expenses. Also, a Deep Retrofit will enable a building owner to comply with current and future regulatory reporting requirements due to automated benchmarking data collection.

Rental Revenues: According to a primer for building owners and developers published by the Appraisal Institute in conjunction with The Institute for Market Transformation, Deep Retrofits have the potential to improve tenant-based revenues which are those revenues generated when building owners are able to monetize enhanced demand resulting from the Deep Retrofit.

“In many markets, rental premiums are emerging in green buildings as many of today’s best tenants are increasingly willing to pay a premium for green spaces… National studies for commercial office buildings back up this trend on rents and occupancy, as certified green buildings outperform their conventional peers by a wide margin (According to recent studies, the premium can range from 2% to 17%).

“Occupancy premiums can lead the case for green investments. If it can be determined that the green features will result in higher occupancy (through market research) than an otherwise similar building, a significant argument can be built for increases in value (from a reduced vacancy factor). Further, a LEED-certified building will attract demand from governmental agencies, Fortune 500 companies, major banks and insurance companies and other tenants who have corporate sustainability guidelines.

“Savings may be experienced as a result of tenant retention and the corresponding reduction in lost rents, reduced retrofit costs upon releasing spacer, lower vacancy at turnover and improved lease terms.

“Along with this improved occupancy premium, quicker absorption may be experienced in new properties or those that have been repositioned as green.”

While the calculation of the increased income is the same as for a traditional building investment analysis, the determination of the key assumptions requires extensive market research to support the assumptions which are input into a discounted cash flow model, like ARGUS® Valuation DCF.

Sales Revenue Premium: Increased property values are realized from the higher net operating income realized due to reduced expenses and increased tenant revenues, lower capitalization and discount rates which result from risk-mitigating protections sustainable and resilient buildings provide property owners and banks, higher quality tenants, and increased investor demand. Recent surveys show that green commercial buildings trade at a premium ranging from 6% to 35% depending on the certification and the market. Studies have shown that capitalization rates for Energy Star and LEED-certified buildings are between 50 and 100 basis points lower than those for brown buildings.

Since the analysis is to determine the premium due to sustainability and resiliency improvements made to a commercial building. To complete this analysis, it requires the creation of a Cash flow projection under two scenarios:

Baseline: A baseline projection is prepared based on the property in its current operating condition and market position; and

Post-retrofit: This projection incorporates the retrofit development costs, the reduced operating expenses, the premium rental revenue and the any anticipated reduction in cap rate.

The difference in net operating income and the reversionary value is discounted based on the risk profile of the property and the investment to determine the value add from completing the Deep Retrofit.

The benefits of a Deep Retrofit can be significant!

With over 30 years of experience in acquisition due diligence, property valuation and cash flow forecasting as well as the ability to conduct the diagnostic assessment and create a Deep Retrofit program and budget, Emerald Skyline is uniquely qualified to be your advocate in planning, analyzing and executing your sustainable and resilient retrofit project.

One key obstacle to overcome for commercial buildings is the incongruous lease structure. Under the most common commercial lease structures (Modified Gross and Net), the costs of a sustainable retrofit are borne by the owner while the cost savings from reduced utility bills and maintenance costs as well as the improved indoor environment inure to the benefit of the tenant.

The solution is to create a lease structure that equitably aligns the costs and benefits of efficiency, sustainability and/or resiliency between building owners and tenants, known as a Green Lease (also known as an aligned lease, a high performance lease or an energy efficient lease). In short, a green lease facilitates cooperation between landlords and tenants to make their buildings and individual spaces energy and water efficient.

Last month, the US Department of Energy acknowledged property owners, tenants and brokers who are leaders in using green leases to save energy and water in commercial buildings. In a July 2nd National Real Estate Investor article entitled “The Greening of Leasing,” Susan Piperato interviewed Jonathan Saltberg and Jaxon Love of Shorenstein Properties which was one of the “Green Lease Leader” honorees.

According to Jaxon Love: “We survey our tenants annually on sustainability and track interest and satisfaction with our program. In 2014, 66 percent of our tenants indicated that green building operation is important or very important to their company; 68 percent of tenants indicated that our green building operation is good or excellent.”

Further Ms. Piperato reports that Shorenstein Properties has cut energy use by 16.2% and cut carbon emissions by almost 15% which is in-line with industry expectations of a 10% to 20% savings in energy and water monthly.

According to Meaghan Farrell, energy and sustainability service, Jones Lang LaSalle (JLL), “Green leases combine the productivity, comfort and sustainability features that tenants are looking for in office space while supporting landlord priorities of improving the triple bottom line and occupancy rates. In addition to achieving both tenant and landlord objectives, green leases have social, economic and environmental implications for companies operating in today’s global economy. Green leases truly are the future of commercial real estate.” (10 Reasons to Sign a Green Office Lease, Meaghan Farrell, Environmental Leader, 10/22/2014. http://www.environmentalleader.com/2014/10/22/10-reasons-to-sign-a-green-office-lease/#ixzz3GtXfESRz)

Green leases not only bring congruity to the financial requirements necessary to do a sustainable retrofit of a building but also to encourage owners, tenants and their employees who occupy the building to employ sustainable building operations.

The JLL Energy and Sustainability Services team has identified that collaboration by tenants and landlords in negotiating and executing a Green Lease results in the following ten benefits (Shorenstein Properties notes that the collaboration required to create a green lease is the first benefit of the program):

Do the right thing for the earth and humanity in order by reducing the building’s carbon footprint

As stated by Adam Siegel, VP – Retail Industry Leaders Association (RILA), “Green leasing is a process to identify lease provisions that can potentially be modified to address both landlords’ and tenants’ sustainability goals. These provisions tend to foster efficiency improvements that can save both parties money.”

As reported by the RILA Retail Green Lease Primer, lease provisions that modify a standard lease agreement to a green lease fall into five primary areas:

Provide for improvements to the base building shell and common areas;

Provide for improvements to the tenants’ interior spaces consistent with the building’s permitted uses;

Encourage efficiency investments by allocating the benefits derived to the party that is making the investment;

Facilitate the sharing of energy and water usage and waste generation data increasing required for compliance with municipal benchmarking regulations or LEED/Energy Star certification guidelines; and

Clarify who has the rights and responsibilities to make sustainable improvements in spaces like the rooftop.

According to the Shorenstein Properties team, the Green Lease provisions that they are working to incorporate into all of their leases include: Energy alignment; tenant sub-metering, energy information sharing, building performance certifications and green building standards.

Extend/lengthen the lease term which reduces waste associated with tenant replacement and improvements;

Expense reimbursement methodology (.In an article published in the September/October 2010 issue of The Leader, Elizabeth King Fortsneger, a CPA and LEED AP, states: “If the goal is to keep both owners and tenants motivated to support the building’s green initiatives, the modified gross lease, net utilities with sub-metering and possibly an expense stop (full service except the tenant pays utilities) may be a viable alternative.”);

Permitted use that define allowable/restricted uses for the leased premises;

Leased premises tenant build-out specifications;

Capital improvement provisions that allow the landlord to amortize and recover capital costs associated with qualifying sustainable improvements to building and common areas;

Include low-cost efficiency project expenditures in the definition of operating expenses for tenant reimbursement;

Align tax benefits and other monetary incentives for building improvements with the investing party (landlord or tenant);

Submeter each tenant space for electricity, natural gas and water with billing of tenants based on the submeter readings where state codes and utility tariffs allow it (According to Mr. Love, “…submetering…gives the tenant direct responsibility for and control over their energy (and water) cost. The economic incentive to save energy is a powerful motivator.”);

Utility data sharing whereby the tenant provides energy and water consumption data to the landlord monthly while the landlord provides the tenant with periodic reports on the performance of the whole building. As more cities require benchmarking information from landlords, the ability to gather the necessary information from tenants is a necessary condition for regulatory compliance;

Specify sustainable maintenance policies, procedures and materials for use in tenant spaces;

Specify sustainable maintenance policies, procedures and materials for use in common areas;

Define tenant obligations to participate in recycling programs which facilitates the sustainability objective of reducing waste that goes into a landfill; and

Allow rooftop or general access and control to install energy generation systems (solar power) and/or other sustainable improvements.

NOTE: For existing tenants, green lease provisions can be added to the existing lease through a “green lease addendum” that replaces or supplements portions of the lease by adding terms and incentives.

As with every lease, both landlords and tenants need to work together to develop the green provisions appropriate to the property, its use and the tenant space. Quantifying the costs and benefits may require a green diagnostic review/assessment which provides a baseline understanding of the current property operations for inclusion as benchmarked sustainability criteria in green leases, or current lease addenda.

Working with an advisor like Emerald Skyline Corporation whose principals understand both commercial leasing and sustainability can help facilitate the negotiations and the accomplishment of both your investment objectives and your sustainability goals.

Florida is undeniably sunny. “The Sunshine State” was adopted as the State Nickname in 1970. It is used on motor vehicle licenses, welcome signs and marketing campaigns. While Florida promotes itself as the Sunshine State we are not utilizing our most abundant and natural resource, solar power.

What is solar power? It is energy from the sun that is converted into thermal or electrical energy. Solar energy is the cleanest and most abundant renewable energy source available. The U.S., including Florida, provides some of the richest solar resources in the world. Only two other states, California and Texas, have more rooftop solar power potential than Florida, according to the U.S. Department of Energy. Based on Florida’s size, rebounding economy and growing population our state should be a leader in the generation and promotion of solar energy.

So why isn’t Florida a solar energy leader?

The reason is simple: Florida’s large utility monopolies and lawmakers have worked successfully to block and control who can generate solar energy and what it can be used for; thereby restricting its use by homeowners and businesses. Florida utility monopolies exist today due to a law that was created over 100 years ago which was trying to avoid a tangle of power lines strung up by competing companies. This same law restricts solar companies from installing solar panels on roofs and selling back electricity. It is considered a third party sale and is illegal in Florida.

Florida is now only one of four states in the nation that prohibit citizens from buying electricity from companies that will put solar panels on a building.

Due to the influence and power of Florida’s utility monopolies, there is a large effort to discourage renewable energy in the state. The large utilities are afraid of losing their monopoly and the lucrative profits that the government guarantees them. Recently lawmakers, at the direction of the utility companies, gutted the State’s energy savings goals and entirely eliminated Florida’s solar-rebate program.

Floridians should have access to solar power and free market choices. We should be allowed to contract directly with solar providers to power our homes and businesses with solar energy. We are currently being denied the right to choose solar as a power source. The free market and competition benefits all of us. Solar energy makes financial sense. That is why business leaders in America’s brightest, most competitive companies are increasingly choosing to install solar energy systems at their facilities. The price of solar energy has fallen dramatically over the past few years while the price of fossil fuel generation continues to experience volatility. America’s businesses are turning to solar power because it’s good for their bottom line.

According to a report by the Solar Energy Industries Association, Walmart is the top corporate user in the United States with 105 MW installed at 254 locations.

The average price of an installed commercial PV (photovoltaic) project in 2Q2014 was 14% less than the cost in 2013 and was over 45% less than it cost to complete in 2012.

The Solar Means Business report noted that the top 25 companies for solar capacity had more than 569 MW of solar PV at 1,110 different facilities in a survey conducted last August. These results represent a 28% increase over the prior year and a 103% increase over 2012.

Clearly, solar power is a great untapped resource for the Sunshine State – one that can benefit residents as well as businesses. It is time to enable Floridians to have unfettered access to this inexpensive energy source – and you can help in the process:

The Florida resident-led solar group, Floridians for Solar Choice, is seeking to make solar more accessible in the state. They are seeking your signature on a ballot petition.

The petition seeks to expand solar choice by allowing customers the option to power their homes or businesses with solar power and chose who provides it to them.

Floridians for Solar Choice have reached 72,000 signatures on their petition which clears the way for it to be reviewed by Florida’s Supreme Court.

The Supreme Court will decide whether or not the petitions language legally qualifies it to be a ballot initiative for Floridians in 2016.

Getting its petition on the 2016 ballot is the main goal for Floridians for Solar Choice. They need over 600,000 more signatures to have this critical citizen initiative to be put on the ballot for next year.

Please visit their website to learn about the solar initiative to remove this legal barrier to making Florida the Sunshine State again, and, more importantly, to sign the petition, go to: www.FLsolarchoice.org.

A sustainable retrofit includes replacements and upgrades that result in lower energy, operating and maintenance costs as well as improved occupant satisfaction. A sustainable facility will have a small carbon footprint, limited environmental impact and conserves natural resources. They can range from replacing conventional lights to LED bulbs, adding motion-control switches and installing low-flow water fixtures to installing a green roof, replacing the building skin and adding solar panels to all of the above.

When you fully understand the economic benefits of doing a sustainable retrofit which include lower expenses and rent and occupancy premiums resulting in higher NOI as well as reduced cap rates resulting in higher long-term values, you realize how few property owners, managers and tenants have actually made the decision to pursue an upgrade of their building(s), it initially does not compute a United Nations Environmental Program Finance Initiative Investor Briefing entitled “Unlocking the energy efficiency retrofit investment opportunity” reports:

In a 2012 study by The Rockefeller Group and Deutsche Bank Climate Change Advisors, however, reported that approximately $72 billion in capital is needed to be invested in sustainable retrofits to effect profitable energy efficiency in the existing building stock. However, the total spent in 2012 was just $1.5 billion.

Once you understand the relative perspective of the stakeholders in both the investment and the benefits, the resistance to effecting a sustainable retrofit can be understood. Let’s dissect the framework in which the decision to make sustainable improvements are made and the issues and motivations that cause a property owner not to update and improve their property which are:

Short-term investment horizon

Incongruous lease structure

Capital and operating budget limitations

Financing availability, complexity and/or cost

Limited knowledge, time and/or motivation to effect energy upgrades

Understanding these investment, operational and financial constraints is the first step in developing solutions that will result in making the sustainability and resiliency of the existing stock of commercial buildings feasible and practical.

Short term investment horizon:

In the era of REITs, CMBS, hedge funds, crowdfunding and private equity, investment hold periods are frequently in the 3 – 7 year range when investors can typically optimize the IRR and other profitability measures or bail on a bad investment and reallocate their capital. As a result, many investors will only consider sustainability measures that have a two-to-three year payback period. Deep energy retrofits with savings of 30% to 50% that result from retrofitting multiple building systems requiring more time and capital to effect are tabled and not done.

Solution: The current and prospective investment environment will continue to reflect hold periods that are relatively short; however, the solution is for investors, owners and managers to realize that a sustainable retrofit enhances the long-term value of the property and will cause investment returns to increase. Including the costs and benefits of upgrading a building is a common way for sponsors to demonstrate the inherent value of a property – especially one that is not fully leased or suffers from functional obsolescence or poor aesthetics and other physical limitations on its marketability to prospective tenants. Many business plans include upgrading a building from one class to a higher class which results in increased rents and lower cap rates. As evidenced by many studies, including sustainability and resilience in the business plan is an increasingly important component in any market-oriented building upgrade. The solution is for sponsors, investors and owners to realize this and to put it into practice.

Future articles will present sustainable ideas many of which can be implemented with no capital investment required.

Incongruous Lease structure

Commercial buildings, a/k/a income properties, are leased to tenants pursuant to a variety of lease structures with the four most common being as follows:

Gross Lease, or full service gross, is a lease where the landlord/owner collects a stipulated rent amount and is pays all expenses including real estate taxes, insurance and operating expenses that are comprised of utilities, repairs and maintenance and management. The room rate paid for a night in a hotel and a lease for a self-storage unit are examples of gross leases.

Apartment leases are typically considered to be a gross lease as the landlord is usually responsible for all operating expenses including real estate taxes, building insurance, common area maintenance and utilities, and property management while the tenant is responsible for the unit’s electricity (and sometimes water) and interior maintenance.

Modified Gross Lease is a gross lease where the landlord/owner collects a stipulated rent amount plus a reimbursement of real estate taxes, insurance and operating expenses which exceed an agreed upon amount which is typically an estimate of the building expenses for the initial lease or calendar year. Typically, at the end of the year, the actual expenses are reconciled to the estimate and any increase is passed to the tenant based on its pro-rata share. Most multi-tenanted office buildings are leased pursuant to modified gross leases.

Net Lease is a lease where the landlord/owner collects a stipulated rent amount plus building expenses which include real estate taxes (net), taxes and insurance (double net); or taxes, insurance and operating expense (triple net) depending on the terms of the lease. If the building is multi-tenanted, the tenant pays its pro rata share. Most net leases are currently triple net. Retail properties are typically leased using a triple net lease.

In a standard Full Service lease, there is no split incentive in the lease structure as any and all savings realized from a sustainable retrofit inure to the benefit of the owner; however, the property manager may not be incentivized to promote a retrofit as it would be responsible for supervising and effecting the improvements without any additional management fees. With regard to an apartment complex, the landlord’s incentive to invest in energy efficiency measures is limited to the common areas – or to improve the competitive position and marketability of the units to prospective tenants.

In a standard Modified Gross lease as well as a Net lease, the landlord/building owner is not incentivized to invest the time, money and personnel resources to effect a sustainable retrofit as the landlord receives no direct financial benefit as the tenant pays the operating expenses and receives all of the benefit of lower operating costs.

Solution: Creating a lease structure that equitably aligns the costs and benefits of efficiency, sustainability and/or resiliency between building owners and managers, known as a green lease, aligned lease, high performance lease or energy efficient lease, will create sustainable and substantial benefits, both quantitative and qualitative, for both tenants and owners/landlords.

According to Jones Lang LaSalle, “A green lease need not be complicated. Often it merely requires structuring terms and agreements already in place, such as temperature settings and building operating hours, in a fashion that provides sustainable cost savings with negatively impacting building performance.”

To effect a green leasing program that includes both current and prospective tenants, engaging a consultant that understands both commercial lease structures and efficiency and sustainability retrofits to maximize the sustainable benefits to be derived therefrom.

Green leases will be addressed in detail in a future article.

Capital and operating budget limitations

Many properties suffer from a breakdown in communication and financial planning between building managers and building owners. Building managers typically operate a facility pursuant to a one-year budget which causes them to budget and implement projects with a short term (1- 2 years) payback period. Consequently, capital improvements that have a longer payback period are not often recommended by management, or if recommended, not implemented by ownership due to a combination of knowledge, time or motivation to consider an energy upgrade or a perceived lack of available capital. This short-term horizon again limits the nature and extent of any efficiency or sustainable upgrades and prevents ownership from reaping all of the economic benefits that inure from a building retrofit.

Further, many times neither building ownership nor building management understand the nature and availability of financing options, tax credits, utility and local government rebate programs. Some of the programs, or a combination of programs, can result in building owners not having to come out of pocket to fund the improvements; however, the unique nature of them requires time which is typically focused on achieving the primary business goals of the organization.

Solution: Engage a sustainability consultant with knowledge of property operations and management as well as the nature of the available financing, credits and rebates – and how to source and evaluate alternatives in order to minimize actual investment dollars and the cost of any financing incurred. Conducting a life-cycle analysis in addition to other financial analyses will provide ownership with the information needed to make the business decision.

Future posts will present investment analysis tools and methodologies with examples of the real economics of sustainable retrofits.

Financing availability, complexity and/or cost

Contrary to popular belief, energy efficiency and sustainability retrofits benefit from a variety of financing alternatives. However, for real property professionals who work with mortgage loans, mezzanine loans, preferred equity and similar forms of financing, retrofit financing options ranging from equipment leases to ESCO (Energy Service Company) contracts and PACE (Property Assessed Clean Energy) liens is a whole new world. When you add in the variety of tax credits, utility rebates and vendor financing, the options become complex.

Further, the sources for financing a retrofit are not usually the same ones that provide mortgage financing so it is a new arena which makes accessing sources and evaluating options time consuming and prohibitive.

Solution: Engaging a professional who is familiar with the types and sources of retrofit financing as well as the typical structures and issues of which owners should be aware is the easiest and most efficient way to determine and evaluate the options based on the financial and non-financial objectives of the owner.

The various retrofit financing options, examples of tax credits and utility and municipal rebates will be described and explained in future posts.

Limited knowledge, time and/or motivation to effect energy upgrades

In today’s competitive commercial real estate environment that is still recovering from the devastatingly harsh Great Recession of 2007, keeping your focus on the primary business of keeping space leased (as hoteliers say – heads in the beds) and watching every penny to the bottom-line is the first priority of owners and managers.

Even though the results of an efficiency, sustainability and/or resiliency retrofit provide a substantial boost to the net operating income (and cash flow) of a property, it does not become a high priority item due to lack of understanding of the process, the capital, management and labor requirements, the extent of the potential disruption to operations and tenants as well as knowledge of the additional value (rent premiums, occupancy premiums, higher quality tenancy, lower cap rate, increased investment value) and business benefits (reputation, image, goodwill) to be derived therefrom.

Also, many times building management staff, who may have the understanding of the sustainability technology will not have the financial literacy to present a compelling case to ownership.

Further, many energy service providers (who are typically considered to be the expert in facilitating a retrofit) do not know or understand the financing options that are available to building owners. Accordingly, these professionals are not able to property advise an owner on energy project financing. Accordingly, many owners are not aware of, nor understand, the variety of financing mechanisms available to them.

Solution: Learn enough to realize that it is worth the time to learn about the options that are available, hire a sustainability consultant, architect or engineer to analyze the property, benchmark its energy and water usage and understand other maintenance practices, have the systems retro-commissioned to determine how well they are performing and develop an efficiency, sustainability and/or resiliency retrofit plan. Implement the plan and start realizing the benefits.

Our Sustainable Benefits blog will be your resource to learn and understand the new world we are transitioning into – one in which we leave the world better off for having lived (Emerson).

Elisabeth Comere
Director, Environmental and Government Affairs
View the original article here

When asked why recycling is so important, my response is simple: it is integral to business. Recycling is a fundamental requirement to uphold competitiveness and reputation as responsible and innovative companies.

For decades, companies and their respective trade associations have invested in various recycling initiatives aimed at recovering their own used packaging and printed paper products. While initially such efforts reaped measurable recovery benefits, very little progress has been made in the past 10 years. We, too, have seen firsthand the benefits of a carton-specific voluntary approach through our own efforts and that of the Carton Council. However, future carton recovery progress relies on addressing the infrastructure, promotional, and harmonization needs that affect the recovery of all packaging and printed paper materials.

Discussion is ongoing among brand owners, packaging manufacturers and other “producers” regarding how to substantially increase material recovery and recycling in the United States via cross-sector collaboration. While it has not led to much action to date, the forums for discussion have kept the conversation alive and have succeeded in elevating the knowledge and awareness level of all stakeholders through the process. The dialogue exposed the risks of inaction as well as the opportunities inherent in a robust recovery system.

Discussions have also led to extensive research conducted by multiple organizations to develop an understanding of the nuances that impact recovery success. AMERIPEN, for instance, has collected data and developed findings regarding what works best to dramatically improve recovery in cities across the US. AMERIPEN’s study combined with other research efforts have laid the groundwork by defining what needs to be done. It is now clearly understood that effective recovery requires a comprehensive set of best practices – optimized infrastructure, effective promotion and education, incentives, policies aimed at boosting recycling participation, and sustainable program funding. Implementing best practices in all of these areas is unreasonable to ask of local governments and is more than any one material sector can bring about on their own.

Forums like Alcoa’s Action to Accelerate Recycling and AMERIPEN have primed stakeholders for collaboration bringing the right people to the table and raising the right questions to facilitate action.

The New Ask

Industry is now rallying around a new call to action: create an organized coalition(s) of private and public sector representatives to create a scalable but phased systems approach to recycling. Building upon past learnings, this approach will leverage pooled resources and use a combination of tools to strategically address priority opportunities as opposed to a series of discreet pilot programs and projects.

Experimentation in Coalition Building

To support the move from talk to collaborative action, my company is launching projects in Tennessee and North Carolina that will target communities with customized action plans addressing multiple barriers to materials recovery performance. Depending on a community’s existing infrastructure and resources, we have identified the policies, practices and investment focus areas that will yield the greatest impact on recovery. Examples include recycling mandates or ordinances for variable-rate waste collection pricing, a transition to single-stream, roll-cart recovery systems, investment in optimizing processing facilities, working with state government to align policy and grant funding with local needs, and so on. We have estimated a total increase in recovery of over 220,000 tons if best practices and a robust outreach and education campaign are brought to bear on recycling programs across Tennessee.

We see our role in this experiment as the catalyst for collaboration. We are now building informal coalitions in Tennessee and North Carolina with key industry and government stakeholders to bring these system improvements to fruition. This experiment is testing a series of approaches on the ground to see what works at the local level allowing for replication elsewhere on a greater scale.

Aiming Higher: The SERDC Coalition

We now want to move forward with regional campaigns for collaborative voluntary producer initiatives – campaigns that build upon the learnings from state-by-state activities and stress best practices in packaging recovery to overcome funding constraints, infrastructure gaps and barriers to policy adoption.

In support of this idea, we took part in the Southeast Recycling Development Council’s (SERDC) Paper & Packaging Symposium this month in Atlanta. Involving over 100 participants, SERDC issued a straightforward call to action: Work together to recover more recyclables, of better quality, and quickly.

A common discussion thread was what distinguishes the SERDC initiative from past efforts and how that will bring about success. Key differences are that SERDC is an established organization of state government and industry partners and other key stakeholders – the influencers are already at the table. Research to inform priorities for the region has been conducted and the group is ready to move on building the organizational mechanism to transition from research to action.

SERDC recovery initiative partners intend to explore the optimum levels of engagement of public and private resources, expertise and funding. Given growing consumer expectations and the threat of government regulation, the risk of inaction surpasses the rationale for a laissez-faire approach. We all have a stake in the outcome of recycling performance in this country and will achieve more by combining forces than through disparate action. We call on you to commit to participating in SERDC’s coalition.

Elisabeth Comere is the director of environment and government affairs for Tetra Pak in North America, the world leader in packaging and food processing solutions. She joined the company in 2006 as Environment Manager for Europe where she helped define and drive Tetra Pak’s environmental strategy. She joined the North American operations in 2010, focusing on advancing Tetra Pak’s commitment to sustainability in the US and Canada, and she is active in various industry and customer packaging and sustainability initiatives. Elisabeth previously served as a political adviser to a member of the European Parliament in Brussels, Belgium, and headed the environment department of the Food & Drink Industry group in Europe.

Today’s sustainability investment options are extensive and broad ranging, including relatively straightforward efforts (e.g., energy conservation projects) to multi-year/multi-stakeholder initiatives (like those that target social and environmental improvements deep within an organization’s supply-chain). While doing any or all of these could yield significant benefits, it is often unclear which will generate the greatest, most enduring value. Faced with this dilemma, leaders often struggle to understand which choices are best and how they should evaluate the many alternatives to ensure the most effective, efficient and sustainable decisions are made.

One way to improve would be to encourage better, more quantitative analyses that examine the full costs and benefits associated each investment in sustainability, combined with an analysis of which could make the greatest contribution for the business, the environment and society simultaneously.

While most understand that “when the economics work, the social and environmental benefits last,” many barriers remain for those wishing to accelerate the pace and effectiveness at which sustainability initiatives are funded and implemented, including:

the lack of a demonstrated link between sustainability and business value;

failure to communicate the strategic potential of such efforts in a way investment decision-makers can understand and appreciate; and

not leveraging proven, familiar processes (that other company functions have applied) to accelerate decision-making and scale solution implementation.

Accenture’s 2013 CEO survey (UN-Global Compact – Accenture CEO Study 2013: Sustainable business and the pace of change) seems to agree, reporting that 37% of 1,000 top executives feel that the lack of a clear link to business value is a critical factor in deterring them from taking faster action on sustainability. It should be noted that this percentage is increasing: in 2007, just 18% reported a failure to trace such a link and in 2010, this figure rose to 30%.

Our experience confirms this trend, as we regularly note good projects that do not receive sufficient (or any) investment as these initiatives are perceived as failing to deliver competitive business value.

From our vantage point, there are two principal challenges that need to be overcome for sustainability to be viewed as a more critical contributor:

First, the “equations” for presenting business cases do not sufficiently include all the benefits of investing in sustainability – specifically, these efforts should include an accounting of potential contributions such investments could make in terms of:

Without accounting for and quantifying all these dimensions, sustainability investments risk appearing less important than other business investments and hence are perceived as not carrying as much “strategic weight.”

Second, sustainability departments are generally not equipped to build and pitch multi-dimensional business cases – this requires a combination of strategic, financial and political skills rarely found among these practitioners. Challenging questions are being posed, and few confident answers are being provided:

Are we realizing value expected from existing, funded sustainability initiatives?

We have many sustainability investment choices, but which ones are the best for our business?

How confident are we that our actions will yield the tangible and intangible benefits promised by the business case?

Do we understand the true business impact and cost of doing nothing?

How do we increase the reliability and credibility of our business case analyses, and therein, how can we increase the confidence of our sustainability investment decision-making?

Value Creation: Business & Sustainability

Linking sustainability to value creation is becoming a new imperative for business leaders. As such, investments in sustainability must be more connected to both business and societal benefits, improving management of risks/costs and stimulating growth and/or innovation, while simultaneously helping companies better meet societal and environmental expectations and obligations. When building the case, leading organizations are increasingly articulating associated sustainability benefits within a clear and simple framework, one that illustrates how these investments can better protect, strengthen, and/or advance the business.

Frequently, benefits of this sort are intangible, uncertain and generally difficult to quantify in ways that are credible and agreeable to all decision-makers. Determining the appropriate level of analysis, who must be engaged, what input is required, etc., is often a challenge requiring innovative, clever leadership, clear process and strong cross functional engagement to ensure success. Commonly, those that pursue such efforts ensure they always ask:

Am I using the right vernacular, do I understand, and more importantly, use terminology and methods familiar to financial and other decision-makers, or am I only talking in “sustainability speak?”

Have I considered all relevant costs or benefits (tangible or intangible) in my analysis?

Have I engaged the appropriate internal domain or functional experts to gather data, experience and methods needed to build a credible, monetized investment analysis?

Have I accommodated and considered future variability and other possibilities that could impact decisions or outcomes?

Innovators Are Creating the Case for Sustainability Today

Ultimately, value-adding sustainability investments protect, strengthen and/or advance business endeavors while simultaneously improving the environment and society’s well-being. Clearer demonstration of such value creation capability is becoming more common as innovative organizations repurpose standard management and strategic tools to deliver a more compelling case for sustainable investment and action.

As a consultant to private industry for more than 30 years, Tod Christensonpartners with clients to develop and implement fit-for-purpose and innovative solutions to drive sustainability across the entire value chain. He hasunique skills and expertise in the areas of strategic thinking and planning methods, sustainability, corporate social responsibility, organizational diagnosis and coaching, and benchmarking.

John Platko has nearly 30 years of business, sustainability, environmental, health and safety leadership experience. His client engagements involve the development and implementation of strategies, plans and programs that emphasize simultaneous creation of business, environmental and social value for private sector clients operating domestically and internationally. John has led projects in more than 40 countries in North America, Latin America, Europe and the Pacific Rim. He is a founding member of the company’s sustainability practice; a leader in Antea Group’s Accounting For Sustainability – AA4S decision-support service; and the primary architect of iEHS, the company’s web-based environmental, health, safety and sustainability information management platform.